COGS stands for “Cost of Goods Sold“, and is an accounting term used to denote the direct costs associated with producing a specific good or service. This cost includes the purchase price of materials, labor costs such as wages, and any other direct expenses related to the production of the item or service in question. COGS is often compared to Gross Profit Margin (GPM), which is calculated by subtracting Total Revenue from COGS. GPM is different from COGS because it does not include indirect expenses, such as marketing and rent, that are not directly related to producing the goods or services being sold.
COGS can be further broken down into two categories; fixed COGS and variable COGS. Fixed COGS remain consistent regardless of how much a company produces, while variable COGS are more dependent on production levels. Examples of fixed COGS include factory rent, property taxes, and insurance premiums—these costs stay relatively stable no matter how much product is produced. Variable COGs on the other hand may include material costs (raw materials), packaging materials and labor costs—all of which may fluctuate depending on production levels.
COGS should be tracked carefully by businesses in order to ensure profitability through accurate assessment of goods produced versus cost incurred in making them. Understanding this information helps inform decisions about pricing strategies and product lines that will allow for greater profitability in the long run. Additionally, tracking these numbers can provide valuable insight into production efficiency and help identify areas where improvements can be made in terms of time management, quality control measures, and resource utilization.
